In addition to its effect on individuals and businesses, The Tax Cuts and Jobs Act (TCJA) includes provisions that may have a significant impact on nonprofit organizations. A few of the provisions that will impact nonprofits are:
Changes to itemized deductions limits
The increase in the standard deduction
Transportation fringe benefits to employees
Charitable deductions associated with preferred seating
Multiple unrelated businesses
Standard Deductions and Itemized Deductions
Increases in the standard deduction, greater limitations on deductions for state and local income and property taxes, and changes to contribution limits are some of the areas that could influence decisions regarding whether individuals make contributions. Charitable contributions deductions are included in itemized deductions. There is a chance that tax filers may reduce their level of charitable contributions if they will lose the tax benefit of doing so.
For tax years beginning January 1, 2018, the standard deduction was increased to $12,000 for individuals and married filing separately; and $24,000 for married couples filing jointly. These increases in the standard deduction may reduce the number of tax filers that choose itemize deductions, thereby resulting in a decline in charitable contributions (which are included among itemized deductions). Approximately 30% of tax filers elected to itemized in 2016.[i]
The TCJA limits the deduction for state and local income, sales, and property taxes to $10,000 combined, further impacting the decision of whether, or not, to itemize deductions. Prior to the act, these deductions were not limited. Of the 30% of tax filers that itemize deductions, nearly all of them take the SALT deduction. In the 2016 tax year, the average SALT deduction was $12,540.[ii] It is expected that this will have the greatest impact on tax filers in higher tax states and those with income over $100,000.[iii] Mortgage interest, however, remains deductible. Although, for homes purchased after December 31, 2017 the amount of eligible mortgage debt has been reduced to $750,000 for married taxpayers filing jointly ($350,000 single/married filing separate).
There are a few changes that may offset the above affects. The TCJA increased the charitable giving limits for taxpayers who itemize deductions from cap of 50 percent of adjusted gross income (AGI) to 60 percent of AGI. This change enables higher income taxpayers to deduct a higher percentage of their overall income for contributions to charitable nonprofits.
Prior to the TCJA, wealthy individuals were
limited in the amounts that they could deduction for charitable contributions.
The limits were 3% for each dollar of AGI over the threshold amount ($261,500
in 2017), up to 80% of AGI (“Pease Limitation”). The TCJA suspends those limits
allowing for great amounts of contributions for high income tax filers desiring
to make charitable contributions.
Although most donors do not make contributions primarily for the expected tax
benefits, it is expected that a decrease in the number of tax filers that
itemize deductions will affect the level of individual charitable
contributions. Some experts estimate that these changes could result in as much
as a 4% to 5% decrease in charitable contributions.
Employee Transportations Benefits
Prior to the TCJA, nonprofit employers could deduct the cost of transportation fringe benefits provided to their employees. These benefits were tax-free to the employees and included the costs of qualified transportation fringe benefits (QTF) [including bus passes, van pools, parking passes/reimbursements, and bicycle commuting reimbursements], cost of providing parking facilities to employees, and on-premises athletic facilities.
These costs can no longer be treated as tax-free benefits to employees. This change covers both for-profit business and nonprofit organizations. Nonprofit organization that choose to continue providing these fringes benefits free to employees must treat the cost as unrelated business income subject to the Unrelate Business Income Tax (UBIT). This tax generally applies to income that isn’t related to the organization’s tax-exempt function and is paid at the corporate tax rate of 21%. The IRS has issued Notice guidance on computing the amount of the tax.
Nonprofit organization that elect not to include the cost of transportation fringe benefits, parking, and on-premises athletic facilities in unrelated business income can treat the costs as compensation and include them on the employee’s Wage and Tax Statement (Form W-2).
Charitable Contributions with Preferred Seating
Charitable deductions paid to colleges that are accompanied by preferential seating at athletic events have been eliminated.
Charitable contributions that are exchanged for an item or benefit of value are non-deductible unless the item or benefits is insubstantial. IRS guidelines generally provide that in the course of a fund-raising event, “when charitable solicitations are accompanied by free, unordered, low cost items, the benefits are considered to have insubstantial fair market value, and the charity may advise potential contributors that the full amount of a contribution is deductible”. [iv]
However, the IRS code provided an exception for charitable contributions in exchange for the right to purchase tickets or seating at college or university athletic events. The donor was allowed to treat 80 percent of the contribution as a charitable contribution. However, the cost of the actual ticket was nondeductible.
The TCJA eliminates the deductability of the entire contribution where it is associated with preferential seating.
Multiple Unrelated Businesses
Nonprofits with multiple unrelated business activities are no longer allowed to offset income from profitable business activities against losses from unprofitable activities. Each activity is viewed separately. Unused losses can be carried forward to future years.
[i] Internal Revenue Service, Statistics of Income, Table A
[ii] Nadia Evangelou, “State and Local Tax Deduction (SALT): The Impact by State”
Economic Updates, Interactive, Local Market Data, Taxes, March 13, 2019
[iii] Eric Clements, “How Tax Reform Affects the State and Local Tax (SALT) Deduction”, TAX LAW AND NEWS, February 19, 2019
